Strategic Education, Inc.
Q4 2010 Earnings Call Transcript

Published: 17 Feb 2011

[Operator:]

Good morning, everyone, and welcome to Strayer Education Inc.'s Fourth Quarter and Full Year 2010 Earnings Results Conference Call. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Strayer Education's Senior Vice President of Corporate Communications, Ms. Sonya Udler. Ms. Udler, please go ahead.

[Sonya Udler:]

Thank you, operator. With us today to discuss the results are Robert Silberman, Chairman and Chief Executive Officer for Strayer Education; Karl McDonnell, President and Chief Operating Officer; and Mark Brown, Executive Vice President and Chief Financial Officer. For those of you that wish to listen to the conference via the Internet, please go to www.strayereducation.com, where the call will be archived for 90 days. If you are unable to listen to the call in real time, a replay will be available beginning today at 1

[Robert Silberman:]

Thank you, Sonya, and good morning, ladies and gentlemen. As is our custom, I'd like to begin this morning with a brief overview of both our company and our business model for any listeners who may be new to Strayer. I'll then ask Mark to report on the detailed financial results for the fourth quarter and the full year of 2010. We already covered our enrollment results for the winter academic term on the call we had in January so I'll just ask Karl to provide a brief update on the operating results. Finally, I'll provide an update on our growth strategy and the company's earnings outlook for Q1 2011. Strayer Education is an education service company whose primary asset is Strayer University, a 57,000-student, 87-campus postsecondary education institution which offers master's, bachelor's and associate's degrees in Business Administration, Accounting, Computer Science, Public Administration and Education. Unlike traditional universities, Strayer's students are working adults who are returning to school to further their careers. Our revenue comes from tuition payments and associated fees. Approximately 75% of that revenue comes to us from federal Title IV loans issued to our students. Our expenses at Strayer include the cost of our professors, our admissions and administrative staff, marketing expenses and facilities and supplies costs. We serve students in 18 states through our physical campuses, as well as in all 50 states an over 30 foreign countries through our online courses. Strayer University is accredited by the Middle States Commission on Higher Education. And Mark, will you run through the financials?

[Mark Brown:]

Sure. Revenues for the three months ended December 31, 2010, increased 17% to $172 million compared to $147.2 million for the same period in 2009 due to increased enrollment and a 5% tuition increase, which commenced in January of 2010. Income from operations was $58.9 million compared to $52.4 million for the same period in '09, an increase of 12%. Operating income margin was 34.3% compared to 35.6% in 2009. Net income was $35.9 million compared to $31.9 million for the same period in '09, an increase of 13%. Diluted earnings per share was $2.73 compared to $2.32 for the same period in '09, an increase of 18%. Diluted weighted average shares outstanding decreased to 13,156,000 from 13,751,000 for the same period in '09. Revenues for the year ended December 31, 2010, increased 24% to $636.7 million compared to $512 million for the prior year, due to increased enrollment and a 5% tuition increase effective for 2010. Income from operations was $215.8 million compared to $172.4 million for the same period in '09, an increase of 25%. Operating income margin was 33.9% compared to 33.7% in 2009. Net income was $131.3 million compared to $105.1 million in '09, an increase of 25%. Diluted earnings per share was $9.70 compared to $7.60 in '09, an increase of 28%. Diluted weighted average shares outstanding decreased to 13,535,000 from 13,825,000 in 2009. At December 31, 2010, the company had cash, cash equivalents and marketable securities of $76.5 million and no debt. The company generated $162.8 million in cash from operating activities in 2010 compared to $141.8 million in 2009. The company's cash flow from operations for the year ended December 31, 2009, was favorably affected by the timing of a tax benefit related to the vesting of restricted stock in the fourth quarter of 2008. Capital expenditures in 2010 were $46 million compared to $30.4 million in 2009. During the fourth quarter of 2010, the company invested $42.3 million to repurchase approximately 296,000 shares of stock at an average price of $143 per share as part of a previously announced stock repurchase authorization. During the year ended December 31, 2010, the company invested $115.5 million to repurchase approximately 687,000 shares of common stock at an average price of $168 per share. At December 31, 2010, the company's remaining share repurchase authorization was $107.7 million. The company announced today that the company's Board of Directors amended the share repurchase program to authorize the repurchase of up to an additional $100 million in value of the company's common stock in 2011. During the year ended December 31, 2010, the company paid regular quarterly dividends totaling $44.5 million. For the fourth quarter of 2010, bad debt expense as a percentage of revenues was 4.2% compared to 4.3% for the same period in 2009. Days sales outstanding, adjusted to exclude tuition receivable related to future quarters, was 13 days at the end of the fourth quarter of 2010 compared to 14 days at the end of the fourth quarter of 2009. Rob?

[Robert Silberman:]

Thanks, Mark. Karl, you want to just hit the highlights that we haven't covered already on operations?

[Karl McDonnell:]

Sure. Our final winter term enrollment results were essentially unchanged from our announcement in January. Total enrollment increased 4%. Our new student enrollment decreased 20% and continuing student enrollment grew 10%. Our continuation rate declined roughly 100 basis points in the quarter. Enrollment at mature campuses decreased 3%, increased 61% at our new campuses, and our global online students increased 10%. Enrollments from corporate and institutional alliances increased 15%, and we added five new relationships, including relationships with Kroger and American Express. During the quarter, we successfully opened three new campuses, one in Cincinnati, which is our second in that market; one in Dayton, Ohio, which is a new market; and one in Milwaukee, Wisconsin, which is both a new state and a new market. Today, we also announced that we plan to open two new campuses for the spring academic term, including one in Indianapolis, which again is a new state and a new market, and another campus in Dallas, which represents our third campus in that market. In terms of student mix, approximately 70% of our students are enrolled in undergraduate degree programs with Business and Accounting representing roughly 2/3 of that population and graduate programs continue to comprise roughly 1/3 of our overall student mix. Rob?

[Robert Silberman:]

Thanks, Karl. Just going back to the financials for a second. I have a couple of amplifying comments from my perspective. For the fourth quarter, both revenue and expenses were just about right on our forecast for the quarter. As Mark said, bad debt expense at 4.2% was down slightly from the prior year. That led us to be slightly better than our operating margin forecast for the quarter. I think, Mark, when you'd said it was going to be down 150 to 200 basis points, it was actually down 140. That's basically made up of the slightly better bad debt performance. Our EPS of $2.73 was $0.08 better than the midpoint of our forecast, but virtually all of that positive variance was a result of the accretive effect of our share repurchases during the quarter. A couple of key points on the full year financial results. First on the income statement, at this point in the year, Mark and I always like to go back and look at the overall incoming cash flow statements and just see how all the different levers are moving. I know they're moving in concert. So for 2010, 19% enrollment growth led to 24% revenue growth; 20 basis points of margin expansion, which was slightly better than we would have forecast; and $9.70 per share of earnings, up 25% from the prior year. So on the income statement, the relationship between the enrollment growth, the revenue growth, the operating margin and the EPS during the year were all consistent with or slightly better than the financial model that Mark and I had shared with you all back in October 2009. Second on cash flow, again as Mark mentioned, owner's distributable cash was up only slightly for the year as compared to net income, which was up quite a bit. And that is based on the fact that we received a large one-time tax benefit in 2009 from stock-based compensation. If you normalize for that, the growth in operating cash flow is relatively consistent with the net income. And we have slightly higher-than-normal CapEx in 2010. During the year, we generated $163 million in cash from operations. That is really a key metric that we look at here. And we received approximately $3 million in cash proceeds and tax benefits from stock-based compensation transactions during the year. Again, in the largest picture,, we use that $166 million plus $64 million of cash that was on our balance sheet at the beginning of the year as follows

[Operator:]

[Operator Instructions] And our first question comes from Andrew Steinman (sic) [Steinerman] with JPMorgan.

[Andrew Steinerman:]

In the first quarter, the operating margin depression, could you go over the drivers to that? And could you also mention if there was a tuition increase January of this year?

[Robert Silberman:]

Yes, Andrew. There was a tuition increase January 1, roughly 5%. The drivers, for the most part, are based on lower revenue. We have, with only 4% enrollment growth, 5% tuition increase, a lower revenue growth than we have in the past. We do have increased expenses associated with both the new campuses and just a number of things that we do across the university, hiring faculty, things of that nature. And so in thinking about the various expense categories, similar to what we had in the fourth quarter with lower enrollment, lower revenue, you're going to see a lot of that margin compression in the Instructional and Educational line. I mean, you just have less students per class. We're not canceling very many classes, and we just run them with fewer students. And then the other margin compression is shared pretty evenly across both general, administrative and the marketing and admissions line.

[Andrew Steinerman:]

Is there any stepped-up spending on branding or anything like that?

[Robert Silberman:]

No, it's pretty consistent with our normal pattern.

[Operator:]

And our next question comes from Jeff Silber with BMO Capital Markets.

[Jeffrey Silber:]

On your last call, you had given us, I guess, different scenarios for the 2011 business outlook. I just want to make sure that nothing's changed from that call.

[Robert Silberman:]

Nothing at all.

[Jeffrey Silber:]

Just drilling down a little bit into some of the enrollment numbers, and I asked this question last quarter but I'm going to ask it again. I know your students have an option where they take class, whether it's in the classroom or online. But if you look at maybe your mature campuses, we seem to be seeing a steeper decline year-over-year in your online students than your classroom students. Is there anything going on there that we should be aware of?

[Robert Silberman:]

Well, the one thing to bear in mind is they're not separate students. There are choices that the student makes in that quarter. For instance, over a multiyear attendance at the University, the same student who is enrolled in a mature campus, one quarter would be counted as a online student at that campus and the next quarter, they decide to take classes in the classroom and would be counted as a classroom student. And we sort of think about it similar to how you think about your bank. If you are a customer of a bank and you use the ATM or you use the bank branch to access the bank, you haven't really changed your interaction with the bank. It's just you've changed all your accesses at that point in time. We do have some students who live near a campus, are enrolled at that campus, they're serviced by that campus and take all of their classes for their entire career online. Not very many of those but we have some. So I don't get too granular with regard to this data. We've provided to you to get a sense of asset utilization. I'm not sure that it's definitional in terms of the type of student that we attract or what that ongoing profile's going to look like. With the possible exception that I do think that there's more stickiness, there's more identification, more cohesion for a student who is in the classroom. And those students who access you completely online, you just have a little less interaction with. So in a period of uncertainty or a period of some questioning, that might be a less-robust relationship. But I wouldn't read too much into that because, as I said, those numbers can bounce around quarter-to-quarter, and it's really a access choice that's made by the student for that particular quarter.

[Jeffrey Silber:]

And just a couple of quick numbers questions for Mark. What should we be modeling for 2011 for capital spending and tax rate?

[Mark Brown:]

For capital spending, we think it will be in the range of 5% to 5.5% of revenue. And for tax rate, we're modeling 39.5%.

[Operator:]

Our next question comes from the line of Bob Craig with Stifel, Nicolaus.

[Robert Craig:]

Well, I know it's not your custom, but given the rapid changes we're seeing in the marketplace, I was wondering if you might give us any read on inquiry levels? What we're just trying to get at really is the environment for attracting students getting any worse.

[Robert Silberman:]

We don't comment on activity during the quarter, Bob. The inquiry flow in the fourth quarter for the winter term was actually pretty healthy. But a lower percentage of them, lower percentage of those prospective students decided to enroll for the winter term. And we'll let you know with regard to the spring enrollment once we have all that data.

[Robert Craig:]

You've also made this pretty clear on prior calls but I thought I'd ask it again. I mean, any change in thinking regarding making any adjustments to the cost structure relative to what's currently happening demand-wise? And I'd just liken you guys a bit to Capella, and Capella indicated some cuts the other day without any cuts to student-interfacing areas. Anything being contemplated there?

[Robert Silberman:]

No. We're comfortable with the costs necessary to provide a great education, and we're comfortable with the variability and enrollment, and we like this business model.

[Robert Craig:]

Mark, a question for you. What were the new school losses in 2010? And what should they be in 2011, given the lower campus openings?

[Mark Brown:]

We haven't seen too much variability. Are you talking on a per campus basis?

[Robert Silberman:]

He's talking about the operating income impact.

[Robert Craig:]

Trying to gauge the swing factor, really.

[Robert Silberman:]

It's about $1 million a year per campus. We have less of those in 2011. There's eight of them, so it's probably $8 million to $10 million.

[Robert Craig:]

Any more or less effort being spent here on program development? I think I noticed where you have in the spring several new programs coming on, a couple in the Masters area?

[Robert Silberman:]

Yes. There's not any real difference to that. I mean, we're constantly looking at our programs. We have periodic reviews of our academic curricula. We're not a big developer of brand new programs and for the most part, we're tweaking existing programs to be both academically sound and as relevant as possible. So no, there's nothing out of the ordinary there.

[Operator:]

Our next question comes from Peter Appert with Piper Jaffray.

[Peter Appert:]

Rob or Mark, can you remind me why the revenue per student number looks so robust in the second half of 2010? Is there any reason to think that it's something that would be sustainable into '11?

[Robert Silberman:]

I don't think it's any different in the second half than it was in the first half. I mean, it's increasing roughly by the tuition.

[Peter Appert:]

Maybe I'm doing my calculation wrong but for the fourth quarter, for example, right, your enrollments are up 12% going into the quarter. You're reporting 16%, 17% growth. So it's a little bit of an increment, I guess.

[Robert Silberman:]

Well, it's the increment, is the 5% tuition increase. But that would've been the case with regard to each of the three quarters earlier in the year.

[Peter Appert:]

Yes. It's actually slightly more than that but I guess it's not enough to call attention to it. How about the trend in retention or persistence? Any color on that and any reason to think that could change?

[Robert Silberman:]

Well, it was down slightly in enrollment for the winter. And it's something that we -- actually, much more than the new student enrollment. It's something that we focus on quite intensely. We have a number of things that go on with regard to making sure that we have the right students enrolled in the classroom, and that our academic offerings are both robust and productive to the students, that they stay enrolled. We have said for a long time period that we are at a theoretical max going back a couple of years. Virtually when you adjust for graduations and academic failures, almost 100%. So that down, 100 basis points was not of particular concern to me. If going into the spring and summer, it was continually down by a larger number, then that would get our attention much quicker than the new student enrollment.

[Operator:]

Our next question comes from Sara Gubins with Bank of America.

[Sara Gubins:]

Just the first quarter guidance as to any further share repurchases?

[Robert Silberman:]

No, we never comment on or assume share repurchases as we provide guidance.

[Sara Gubins:]

And then, can you give us the ending share count at the end of the year?

[Robert Silberman:]

Mark, you got that?

[Mark Brown:]

Yes. It was 13,316,822 shares.

[Sara Gubins:]

Rob, in previous calls, you've talked about negative publicity potentially having an impact on a student's decision to enroll. I'm wondering if you have any sense of whether or not that's subsiding at this point?

[Robert Silberman:]

Yes, Sara. I actually -- that's a comment that I think has been taken significantly out of context. And I actually appreciate the opportunity to clarify that. I think the most important thing to focus on is that the decision to enroll in a university for a working adult is a big, big decision to make. We've always felt it's not the sort of decision that's really meaningfully affected for the long-term by the level of marketing or the ability to convince the students. It's a decision that, done properly, really has to be made by the student. They have to convince themselves. And there's a lot of things that keep them from doing that. I was asked a question on the last call as to what the potential sources were of those decisions being made, and I made the comment that there's been an awful lot of publicity about investor-funded education. That was characterized in a lot of accounts, and somehow, we were blaming our enrollment on that. The thing I found most disturbing about that is we're not blaming anything. I mean, we're happy for the enrollment that we have, and we accept the variability. If it's not -- there's a lot of things that can affect the reason that a student enrolls, and there's going to be wide variations. Over the long term, I want to emphasize that we are comfortable with that. There has been less publicity in the last couple of months but partly, that's just the holidays. And for our purposes, the most important thing is making sure that we're doing a great job in the classroom, and that we're defining the university in a way which is appropriate for the incoming students so that they know what it is that they sign up to and how challenging that process is. But there's really not anything different about that than it has been for the years that we've been involved here.

[Operator:]

Our next question comes from the line of Corey Greendale with First Analysis.

[Corey Greendale:]

First, I wanted to ask about, and I was just looking at it here, about the margins and what drove that. But I was a little surprised to see that the marketing admissions expense was billed down as a percentage of revenue, given the decelerating enrollment trends. And just would seem like escalating media rates across-the-board. So could you just provide any commentary on how your -- how it is that, that continues to decrease as a percent of revenue?

[Robert Silberman:]

Yes, that's a good call, Corey. Mark and I had the same reaction originally. You have to understand that we look at a general ledger with much more discrete line items, and we aggregate them at the end of the quarter in that format. So every once in a while, we do see something that looks out of the ordinary as well. It has to do with two things

[Corey Greendale:]

So that would suggest if the new student trends persist, that you could continue to get leverage on that line item?

[Robert Silberman:]

Well, I don't know. We're hoping the student trends don't exist so I haven't really thought about it that way, Corey. But we will have less dollars associated with providing material about the university to a new student who enrolls if we have less new students, that's correct.

[Corey Greendale:]

And I had a question for Karl. I think you said that enrollment from corporate institutional partners was up 15%. Do you happen to have that number for new student and continuing student enrollment for that population?

[Karl McDonnell:]

No, Corey. We just have it in our total enrollment results which, as you said, was 15% up.

[Corey Greendale:]

Could you comment on whether the new student enrollment was positive in that category?

[Karl McDonnell:]

We don't break it out whether it's new or continuing. And I wouldn't want to comment without the information anyway.

[Robert Silberman:]

Corey, I think it's fair to assume that being down as much to we are on new students, I doubt as a category that corporate institutional customers were up. I'm sure they were down less than the overall because in general, again the adhesion, the stickiness associated with having an influencer like an employer, suggests that Strayer University is a place that an employee should want to go, is a helpful factor.

[Corey Greendale:]

And then just one last quick one. I know I'm trying to triangulate on the question about Craig [Robert Craig] was asking earlier. I know you don't comment on future trends, but could you comment on trend as Q4 progressed in terms of student inquiries, people indicating that they are interested in enrolling? Did that improve, deteriorate or was it sideways as Q4 progressed?

[Robert Silberman:]

Well, I think on the call we had in January, I was asked that question and I said that November was really bad and December got better.

[Operator:]

Our next question comes from the line of Bob Wetenhall with RBC Capital Markets.

[Robert Wetenhall:]

Stock price is a lot lower than it was last year from like, I think, a high of $2.60. Any thoughts to you accelerating the buyback program?

[Robert Silberman:]

We don't discuss share repurchases until after they're done. As Mark pointed out, the board authorized an additional $100 million of repurchases at the last meeting.

[Robert Wetenhall:]

I'm not really curious about next quarter. I'm just saying, as an operating strategy, the confidence behind the story and the robustness in the business model. I'm just saying if you think it makes sense to allocate more cash to returning cash to shareholders, if the growth is slowing down?

[Robert Silberman:]

Well, our view has always been that we should return the cash to shareholders that we can't use within the business. We've done it that way for 10 years now. We have a dividend policy, and we have a share repurchase authorization. And the board gives Mark and I the authority to use that share repurchase authorization based on some fairly strict guidelines with regard to what we think intrinsic value is. And so I would say that the strategy of returning capital to owners is consistent with what it's been for the last nine years.

[Robert Wetenhall:]

And what would cause you to either increase or decrease the number of campuses that you would open this year?

[Robert Silberman:]

Well, I don't think anything will cause us to change it for this year because there's some lead time associated with it, and we've already announced the eight for 2011. For 2012, what we'd normally have done is limited that rate of campus expansion only to the depth of our human capital and basically our talent bench. That's how we govern for the risk of academic performances by having great acamedicians (sic) [academicians] who can go out and open up these new campuses. In 2011, for the first time, we had another governing factor, and that is there was an enormous amount of uncertainty with regard to the regulatory structure. That uncertainty hasn't clarified itself yet although I'm hopeful it will over the next couple of months. And so when we make the decision with regard to 2012, which would happen in the third quarter of 2011, we'll look at both our human talent pool and the outside world and decide then.

[Robert Wetenhall:]

And just to your point about the regulatory environment being uncertain, some of your peers have said that they've modified their programs to comply with gainful employment. The draft version, that was put out in June last year. Are you guys thinking about changing the program format in any way?

[Robert Silberman:]

No. We've reviewed the draft version of the rules, and we've said several times that based on what we understand, we believe we would comply. And so until we actually see a final set of rules, we don't have any plans to change either our academic programs or how we offer them.

[Operator:]

Our next question comes from the line of Ariel Sokol with UBS.

[Ariel Sokol:]

So just a couple of questions, and going back, I think it was Jeff who asked about online versus incent [ph] students. Just to kind of complete the question, I don't think he was asking about the Global Online students where there's a deceleration of growth. It doesn't necessarily fit into the context of what you were describing about. And was hoping that you could share your thoughts on the deceleration of growth, I guess, over the last two quarters?

[Robert Silberman:]

Are you asking about our Global Online students?

[Ariel Sokol:]

Yes, Global Online.

[Robert Silberman:]

There's a deceleration of growth across the whole university and it's actually been less in Global Online but that's essentially what's happened. Less of the students in the last six months who have inquired -- potential students who have inquired about enrolling have decided to enroll. So I don't think there's anything specific with regard to the Global Online. In general, we think the Global Online student is a harder student to serve, both academically and from a service perspective, which is why we're building the campus network. And yet the provision of online curricula provides enormous advantages, particularly to a working adult student. So we've always had a model that's tried to capture the best of both platforms and leave it up to the student, those students who live near a campus to decide how they want to access and take the opportunity to the investment we've made in online curricula for those students who contact us who don't need live anywhere near one of our campuses.

[Ariel Sokol:]

And then the next question and I apologize, I don't know if you've released information before regarding the Criminal Justice programs. Does the [indiscernible] enrolled students are enrolled in those programs and just as a point of comparison, what might it have been, let's say, a year ago?

[Robert Silberman:]

You were breaking out there, Ariel. I think you're asking about the Criminal Justice. We opened that three years ago, Mark, Karl?

[Mark Brown:]

It's about two years ago.

[Robert Silberman:]

Two years. It grew quite quickly in the first year. It went from zero to 3% or 4% of our student population. And I think it's pretty consistent with that now. I don't think there was a big move in that one way or the other over the last two quarters.

[Operator:]

Our next question comes from the line of Gary Bisbee with Barclays Capital.

[Gary Bisbee:]

I guess the first question, wondering if you could give a little more color on the selling and promotion spend outlook? I understand the point about there's some materials costs that start, remain weak, would stay lower, and come back, would come back. But I think the sense here was you're sticking with your budget for the year, no matter what enrollment, new enrollment does. And I guess, can you give us a sense what you've budgeted for? So would mid-teens growth in that expense line be in line with the budget? Or would we expect some further deceleration?

[Robert Silberman:]

I don't have that in front of me but our overall business model was that if we had 13% enrollment growth, we'd have stable margins so it's roughly a 17%, 18% increase in expenses. So my guess is that's roughly consistent on our marketing and admissions line. It might be slightly less than that because we're opening only eight campuses. So the percent of new campuses -- a lot of what drives that line, Gary, is the number of new campuses you have in a year because both the new markets that you're in require some advertising to build the brand plus you're hiring a couple of admissions officers per campus and that goes into that as well. So your rate of growth with new campuses will have a pretty big impact of that. But roughly midteens, I would say. Yes, that sounds about right. Gary, one other thing I would say is, I was impressed with the way that Apollo Group broke out those lines in more detail, and I think we'll probably try and do that in 2011, breaking out what's essentially an advertising costs, which in our case is 8%, 9% of our revenue, maybe 10%, I don't remember exactly, it kind of varies. Depending on how many new markets you have and then the salary cost of admission staff and some of these fulfillment costs and things like that. I think we would be able to provide a little more clarity. We didn't do it on this one because we wanted to keep the year consistent. But when we start the new year, Mark and I have been talking with our audit committee about breaking that out in a little more detail so you'll have that.

[Gary Bisbee:]

And I guess the follow-on question, I was looking back at some of the commentary in your call in January, and Rob, you stated your belief that the industry is not overly competitive given a large addressable market. But I think we can't ignore the fact that basically every for-profit competitor who targets working adults either online or campus is really zeroing in on what they've called the quality type of students, community college graduate doing bachelor degree completion and in-graduate. And that's obviously the two areas that you have focused. So how do you think about, if that's had an impact yet, what impact that could have? And at what point would you decide to really make some changes to how you think about marketing strategy or whatnot to deal with that changing environment?

[Robert Silberman:]

Gary, we're never going to be an aggressive marketer. It's just not in our strategy. I don't think it's consistent with your academic mission. I don't think culturally it makes sense. So I believe that there's a very large addressable market. I don't believe that two or three institutions that you all happen to cover is going to make a big dent on that, given the size of the addressable market and the lack of capacity in what I really truly believe is our larger competitive impact, which is the large body of traditional and not-for-profit universities that exists in all the markets that we try to operate. So I'm afraid the answer to your question is never. We think that this model works. We think it works well on. We're comfortable with the variability. We've got a very long-term view and moving from the roughly 25% of the country that we currently operate in to the 100% of the country that we want to operate in for us is a really attractive proposition.

[Operator:]

Our next question comes from the line of Amy Junker with Robert W. Baird.

[Amy Junker:]

Mark, just a quick question on bad debt. I'm wondering your expectations for 2011, how you expect that to trend? Or do you think you're going to be negatively impacted by the change in return to Title IV rules that are occurring?

[Mark Brown:]

No, I don't think we'll be negatively impacted by that.

[Robert Silberman:]

We already handle it that way.

[Mark Brown:]

Our expectations are really just to try to look for continuous improvement there. I'm not sure we were going to see dramatic movements. We're pleased with the progress we've made so far. So that's kind of how we're thinking about it.

[Amy Junker:]

And then just a quick one on share repurchases. Have you or can you disclose if you've done any share repurchases quarter-to-date?

[Robert Silberman:]

Yes, we don't comment on quarter-to-date.

[Amy Junker:]

And just one follow-up question on the business plan. I just wanted to follow up on a question that -- the business plans you outlined did not assume any share repurchases. Is that right, first of all? And then second, given the repurchases you did in the fourth quarter, is it safe to assume that, that EPS range will improve, given the amount of the share repurchases you've done?

[Robert Silberman:]

Both of those are correct.

[Mark Brown:]

Well, the share repurchases we did in the fourth quarter, we did take into account in the January guidance that we've given for the first quarter.

[Robert Silberman:]

So one was correct, Amy, and second one was not.

[Operator:]

Our next question comes from Trace Urdan with Signal Hill.

[Trace Urdan:]

It looked like the pace of leverage at the Educational Services line slowed -- the flow-through margin on incremental revenue is about 57%. I had to go all the way back to March of '03 to find a comparable number that's even below 65% of that line. So can you help me understand what's going on there?

[Robert Silberman:]

I missed the first part of your question, Trace, I don't think you were connected. But the missing part I think I can interpolate. Basically, our Instructional and Education line is made up of the costs associated with running the campuses, running online, providing the academics. Probably, the biggest impact on that is your student-to-faculty ratio and in a quarter in which you have lower student enrollment than you've had in the past, that student-to-faculty ratio is going to go down. We cannot just cancel that many classes because we think it's inconvenient for students that have signed up, and so you're going to see margin pressure on that line. We would expect that, that would be even greater frankly in the first quarter because we have a more severe drop-off in enrollment. If enrollment grows, you get positive leverage on that line because you're filling up those classrooms. But it's not infinite. We won't fill the classroom more than a fixed amount, then you end up having to put more adjunct faculty on board. We baseload our academic staff with our full-time faculty and then the increments, cover it with adjuncts.

[Trace Urdan:]

So just so I understand, by the second quarter, you should have been able to sort of readjust to the enrollment levels that you're looking at? Is that fair? [indiscernible] There's a catch-up factor here, right?

[Robert Silberman:]

On a quarter-to-quarter basis, we will because our expectations for the next quarter's enrollment are somewhat affected by what we have in the current quarters, particularly with regard to continuing students. So again, we don't tend to look at these line items until the end of the quarter and the breakdown that you have them. But just thinking rationally, what's going to happen is we've set up a class structure for our spring term, which was based on the students that we have in the winter term plus whatever new students we may enroll. And there may very well be less of a impact because we'll just have a few less adjunct in that circumstance run a few less classes. But not that much. I mean, to be honest, Trace, there's a certain service component to having enough classes scheduled regardless of your actual student population because the students that you do have need those classes. It's the reason why with a new campus, you have such a negative impact on your operating margins because you're running a bunch of classes that might have two or three students in them as the campus fills up. So I would not see that -- if we continue to have lower than previous enrollment growth, there will be pressure on that line.

[Operator:]

Our next question comes from Arvind Bhatia with Sterne Agee.

[Arvind Bhatia:]

My question relates to the new campus trends. Some of the ones that you've opened last year, I'm just wondering if you can maybe speak to the ramp and enrollment trends there? Are they similar to your notional model for new campuses? Or have they been affected somewhat by the market environment and then other conditions that have affected the other parts of the university? And then my second question is, I know you're not giving guidance on 2012 campus openings. But is it a fair assumption that you will try to populate these campuses around existing markets and get more leverage? Or do you generally have an idea if these are going to be newer markets like Indianapolis and Milwaukee or some other new markets?

[Robert Silberman:]

I'm going to have to admit that question was long enough and complicated enough that I forgot the first part why you're asking the second. Could you say that again?

[Arvind Bhatia:]

The first part is really the new campus...

[Robert Silberman:]

How they performed, yes. The new campuses in the last year have been consistent or slightly better than our notional model. What should be apparent in looking at these numbers is that for a long period of time, several years, our new campus openings have been significantly above that notional model. So I would say the class of 2010, the cohort of 2010 openings was performed maybe a little bit less strong than some of the campuses that we opened in '06, '07, '08 but still well above our notional investment model, and nothing about their performance would keep us from wanting to put more financial and human capital to work and opening new campuses if we have that human capital and we're comfortable with the regulatory outlook. And then the -- now that I've addressed the first part, I forgot the second part. What was the question?

[Arvind Bhatia:]

The second question is really which markets even if you are not willing to give us that number...

[Robert Silberman:]

We always look to contiguous markets. We think that, that's -- in expanding the university, it's the way that you incur the least amount of risk for academic quality if we can make the peer review and oversight process as simple as possible logistically. As between brand new contiguous markets and adding existing markets, that's always a trade-off we make each year, and frankly, we try and do a little bit of both. It has nothing to do with margin impact. It really has to do with, do we have unmet demand in an existing market like Karl mentioned? Dallas has been a great market for us, and we have students that are driving a very long way to get to one of our Dallas campuses. On a peer service standpoint, it makes sense to open a third campus that's closer to where they live. And yet we've got new markets that we're eager to get into, Milwaukee, we've mentioned Indianapolis. And so it's kind of a combination of the two, and we'll make that -- the first and most important decision is how many campuses are we prepared to do, and then we figure out where to put them.

[Arvind Bhatia:]

My last question guys is the 2011 business model, the range of enrollment growth that you've given, the negative 5% to I think 13%. As you move forward, is there a plan to maybe narrow that range down as you get more visibility into the year? Or should we expect that to stay as the guidance range for the year?

[Robert Silberman:]

Well, first off, Arvind, let me make this as clear as I can. That's not guidance. That gives you the mathematical levers to understand our model. We will give you each quarter exactly what our enrollment is, and then for that quarter, you'll be able to see what the impact of enrollment is on earnings. We never try and guess what our enrollment's going to be. We're building this university for the long term, and we're happy with the variability that comes with enrollment. But one thing you'll be able to do as a financial analyst is every time we announce exactly what our enrollment is, you should have one quarters more visibility into what that year end business model is going to look like. And if we announce enrollment, which is sort of in between those numbers, we've given you the factors that allow you to interpolate it as well.

[Operator:]

Our next question comes from Brandon Dobell with William Blair.

[Brandon Dobell:]

I guess a question on new campus strategy. With the openings in Indianapolis and some in Milwaukee, how much of where you guys are choosing to open schools is being driven by where you see the inquiries for global online coming from? Or is it just not a factor?

[Robert Silberman:]

It's not that much of a factor. I mean, it's -- again, in answer to the last question, we look at where we currently operate. And with the exception of Salt Lake City, which we've talked about in the past, we incrementally move out to the nearest geography because that gives us the best opportunity to keep track of the academic oversight and make sure we're providing the classroom experience that we want to. So we were in the East Coast, we were in the border states, Kentucky, Tennessee, so moving up into the industrial Midwest was the next place to go, as well as moving towards the Southwest with regard to Arkansas, Louisiana, Texas. So we'll be looking to get new markets and new states approved on the literal of where we are now and moving into those areas. Again with the one exception was with Salt Lake City, we had so much investment there anyway with our Global Online center and the corporate alliance partner that we had that it made sense to open a campus there.

[Brandon Dobell:]

More about I guess a what-if kind of question. But if you saw a significant uptick in interest, either enrolled students or inquiries from -- I know an area where you just didn't have any presence at all, maybe it's going to be Pacific Northwest, let's say. Would that change how you thought about that as an opportunity because it will be jumping pretty far? Or you think it's just too far away to make that much of a difference and it's just logistically too much of a challenge?

[Robert Silberman:]

It would not change our strategy, and there's a lot of inquiries and interest in all the places that we look at. So markets that we're not in don't seem to be that much difference or it's certainly not a positive difference. But the really important part is lowering the risk of academic execution. And so we try and keep things close to home. We try and keep the interior lines of communication shorter.

[Brandon Dobell:]

I guess a kind of a corporate tuition question. It doesn't appear that there's a whole lot of discounting going on from you guys, and it doesn't appear that the corporate relationships are at a tuition level that's all that much different from your regular listed tuition level. But I just want to be sure that there's nothing else going behind the scenes or on the surface that would distinguish how the corporate channel partners, those students are coming in? Or if you're seeing a need for whatever reason to discount more than you have in the past on particular programs?

[Robert Silberman:]

No, there's not, Brandon. We do have modest discounts for large corporate partners, 5%. In some cases, as much as 10%. We've always had those. I mean, that potentially affects your revenue growth but it tends to offset in operating margin because there's a large amount of cost that we don't have in dealing with students that are coming in en masse from these institutions. The one large institution for which we have a very significant discount is the active duty U.S. military where our tuition's been frozen since September 11, 2001. And that's now, with a 5% tuition increase over 10 years, it's probably, what Karl, about half of what our tuition as everywhere else? Probably about 50% discount.

[Brandon Dobell:]

And then final question, again, kind of a what-if, I guess. At what point do, I guess, does the board or you as a management team see, I guess, variability or volatility in the start number and start to become less comfortable with the idea that you're okay with variability? I mean, down 20% for one quarter is one thing, but down 20% or down 10% or down 15% for a series of quarters? Does that start to, I guess, stick in your craw as not just being temporary volatility but being something structural? Or if you guys can, what is your time frame for starting to change your thought process around what variability means?

[Robert Silberman:]

Let me see, Brandon, if I can elevate the question and make it, I think, more relevant, at least in the way we think about things. The real question is, does it make sense to invest financial and human capital in building a nationwide university? The actual rate of new student growth in any given quarter, even in any given year, is less relevant to that question than what's the value of your education, what's the need for education in the country and at what price point can you cover your academic cost and provide a sufficient return on capital to attract the private investment necessary to do it. We tend to look at those issues over a very long term. As I said, we've been running this university ourselves for 10 years. It's been in existence for 100 years. We think the value of a well-run academically-sound nationwide university over the next 100 years is quite high. And so the kinds of question you're asking, we would always look at in the context of that broadest possible investment decision.

[Operator:]

Our next question comes from Suzanne Stein with Morgan Stanley.

[Thomas Allen:]

It's actually Thomas Allen filling in for Suzi. Quickly, I believe you guys received your fiscal 2009 two-year cohort default rates earlier this week. Can you talk about them at all? And then also, some other companies have been talking about having issues with put loans. Can you talk about that at all?

[Robert Silberman:]

Well, we never comment on draft rates. We get those each year, and they're draft for a purpose because they allow us to sit down with the department in a productive way and make sure that all the data's correct. But I can answer the second question, which is we don't have any issue with regard to put loans. We've accounted for that and think about it with regard to managing our cohort default rate.

[Operator:]

Our next question comes from Peter Wahlstrom with Morningstar.

[Peter Wahlstrom:]

On the corporate side of your business, with the U.S. economy arguably stabilizing and corporate profits recovering a bit, are you even more aggressively targeting these corporate relationships today? Have you seen some of your peers also more actively look to take some incremental share? And then taking a step back, could you give us more of a 30,000-foot view or long-term view of how you think about this segment of the market?

[Robert Silberman:]

Well, the last part of that question is the most important, I think, in that we think it is -- when you're trying to build a university for working adults, as I said earlier, going back to school for a working adult is a very difficult decision to make. And the most effective way, the most lasting way for the adult to make that decision is based on the input of influencers

[Operator:]

And at this time, I'd like to turn the call over to Robert Silberman for any closing remarks.

[Robert Silberman:]

Thank you, Giovan. Thanks, everybody, for participating. We'll look forward to both our annual meeting in late April and then our earnings call a couple of days after that. Thanks very much.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.